The Government has proposed a major overhaul in the manner penalties for under-reporting and misreporting of income are imposed under the Income-tax law. As per the proposed amendments, penalty under Section 270A will now be levied directly within the assessment order itself, instead of being initiated and concluded through separate proceedings.
Existing Framework Leads to Multiple Proceedings
Under the current provisions of the Income-tax Act, penalty proceedings follow a multi-stage process. First, an assessment order is passed making additions or disallowances. Based on such findings, the Assessing Officer initiates penalty proceedings, which are then pursued independently through a separate show-cause notice and culminate in a distinct penalty order after providing the assessee an opportunity of being heard.
This framework, governed primarily by Section 274 of the Income-tax Act, 1961, is designed to ensure adherence to principles of natural justice. However, in practice, it often leads to multiplicity of proceedings, extended uncertainty for taxpayers, and penalties remaining unresolved for years due to ongoing appellate proceedings.
Proposed Amendment to Section 274: Single Order for Assessment and Penalty
To address these concerns, it is proposed to amend Section 274 to provide that penalty for under-reporting of income under Section 270A shall be imposed within the assessment order itself. This change aims to bring finality and consistency by aligning penalty imposition directly with the assessment findings.
The move is expected to reduce administrative burden, improve clarity for taxpayers, and eliminate the need for separate penalty proceedings in such cases.
Relief on Interest Liability Under Section 220(2)
The proposal also introduces taxpayer-friendly relief under Section 220. Currently, interest under Section 220(2) is charged if the tax demand is not paid within 30 days of service of notice, even when appeals are pending.
Under the proposed amendment, interest under Section 220(2) will be chargeable only after the disposal of appeals by the CIT(A) or ITAT, as applicable, including appeals against Dispute Resolution Panel (DRP) orders. This change acknowledges the genuine hardship faced by taxpayers during prolonged appellate processes.
Impact on Dispute Resolution Committee (Section 245MA)
Consequential amendments are also proposed in Section 245MA, which governs the Dispute Resolution Committee (DRC) mechanism for specified small and medium taxpayers. Since penalties will now form part of the assessment order, the DRC’s role in reducing or waiving penalties and granting immunity from prosecution will align with the revised framework, further promoting speedy and cost-effective dispute resolution.
Applicability and Effective Dates
The proposed amendments will be incorporated into the Income-tax Act, 2025 , effective from 1st April 2026, and will apply to:
Assessments, reassessments, or draft assessment orders made on or after 1st April 2027 .
Similar amendments are also proposed in the Income-tax Act, 1961 , covering Sections 274, 220 and 234MA, with effect from 1 March 2026, and applicable for assessments under Sections 143, 144C and 147 initiated on or after 1 April 2027.
Key Takeaway
By merging assessment and penalty into a single consolidated order , the proposed reform marks a decisive step towards simplifying tax administration, reducing litigation, and providing certainty to taxpayers. If implemented effectively, it is expected to significantly improve compliance efficiency while safeguarding taxpayer rights.
Official copy of the Clause is as follows
Imposition of penalty for under-reporting or misreporting of income within Assessment Order:
Under the existing provisions of the Income-tax Act, first an assessment order is passed and based on the findings or additions made in it and subject to the status of appellate proceedings, penalty is initiated in the assessment order by the Assessing Officer. Subsequently, separate penalty proceedings are initiated by giving a show cause notice and a separate penalty order is passed after giving due opportunity to the assessee.
2. Section 274 of the Income-tax Act, 1961 (herein after as “1961 Act”) prescribes the procedure for imposing penalties and mandates that no penalty shall be levied unless the assessee is given a reasonable opportunity of being heard. It requires the Assessing Officer to issue a show-cause notice for which the penalty is proposed, and in certain cases, prior approval of higher authorities is necessary before imposing the penalty. The section ensures
adherence to the principles of natural justice and aims to prevent arbitrary or invalid penalty proceedings.
3. Section 220 of the 1961 Act, deals with the payment and recovery of tax demand, stating that any amount specified in a notice of demand under Section 156 must be paid within 30 days of service of the notice. If the assessee fails to pay within this period, they are deemed to be in default and become liable to interest under Section 220(2), along with possible recovery proceedings such as attachment of property. The Assessing Officer may, however, allow payment by instalments or extend the time for payment, subject to conditions, to provide relief in genuine cases.
4. Section 245MA of the 1961 Act, provides for the Dispute Resolution Committee (DRC). It prescribes for the constitution of a DRC to resolve disputes of specified small and medium taxpayers in a cost-effective and expeditious manner. The Committee is empowered to reduce or waive penalties and grant immunity from prosecution, subject to conditions, with the objective of reducing litigation. The section lays down eligibility, procedure, and binding nature of the DRC’s order, promoting voluntary compliance and speedy dispute resolution.
5. In this regard, it is considered that the above scheme leads to multiplicity of proceedings, as eventually penalty has to be imposed based on the findings of the assessment order and additions made in it and subject to the status of appellate proceedings. Further, taxpayer remains in uncertainty regarding the status of imposition of penalty as the appellate proceedings may stretch to multiple years. In this context, a common order for both
assessment and penalty for under-reporting and misreporting of income will ensure avoiding multiplicity of proceedings which in turn would reduce the compliance of the tax payers apart from providing consistency in levying of penalty.
6. Accordingly, it is proposed to amend section 274, to provide that, penalty for underreporting of income under levied under section 270A to be imposed within the assessment Order. Further, section 220 is also proposed to be amended for charging of interest under section 220(2) only after passing of the order by CIT(A) or ITAT (for appeal against DRP orders ), as case maybe. Consequential amendment is also proposed in section 245MA. The proposed amendments shall come into force in the Income-tax Act, 2025 from 1st day of April, 2026 and shall be effective from 1st day of April, 2027, where any draft of the proposed order of assessment under section 275 is made or assessment under section 270 or reassessment under section 279 is made on or after 1st of April, 2027.
7. Further, similar amendments are also proposed in Income-tax Act, 1961 in section 274, 220, 234MA. It is further proposed that these proposed amendments shall come into force in the Income-tax Act, 1961 from the 1st day of March, 2026 and shall be effective from 1st day of April, 2027, where any draft of the proposed order of assessment under section 144C is made or assessment under section 143 or reassessment under section 147 is
made on or after 1st of April, 2027.
[Clause 11, 13, 14]
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